Piracy - International Group FAQs - August 2012

3. What do hull underwriters cover and what do war risk underwriters cover?

4. Should shipowners carry guards?

5. Should guards be armed?

6. Is cover prejudiced by the use of unarmed/armed guards?

7. Are there any contractual/insurance issues with the use of security companies?

8. Where can shipowners find best guidance to avoid being attacked?

9. Who do shipowners/masters turn to help if their vessel is attacked?

10. What types of help do shipowners/masters need?

11. If shipowners have to pay a ransom, who can they ask to contribute?

12. Are ransom payments covered by the clubs?

13. If there is an attack, can shipowners declare GA?

14. Are shipowners obliged under their charterparty to transit the Gulf of Aden or can they refuse the charterer's orders to do so?

15. What if the charterer pays the war risks AP?

1. Do clubs cover piracy?Club rules contain no definition or exclusion of piracy. The usual liabilities insured by the clubs remain covered when arising out of incidents of piracy.

These liabilities are potentially most likely to involve loss of life/personal injury/illness, trauma/stress treatment and counseling, crew substitution and repatriation, and crew/passenger loss of effects. Liabilities could also extend to pollution, possible wreck removal, and potentially cargo liabilities/General Average (GA) in the case of a shipowner’s contributory fault or negligence. In relation to strict liability claims underInternational Conventions, the “intentional act” defence may provide some protection where/if applicable.

Such liabilities are however excluded from cover if caused by the use/engagement of certain “weapons of war” specifically named in the club rules or “other similar weapons of war” to those specifically named. Also, whereas P&I liabilities arising from acts of piracy are not an excluded risk, those arising from terrorism are excluded (and would fall under the shipowner’s war risk cover). Furthermore, where primary war risk P&I underwriters include piracy as a specific named peril, there may be overlap between P&Iliabilities arising from piracy covered by the war risk P&I underwriters and those covered by the Group clubs.

2. What does “similar weapons of war” mean?“Weapons of war” are identified as being mines, torpedoes, bombs, rockets, shells and explosives. While Club rules have no definition of “similar weapons of war”, the specifically identified weapons of war indicate that something more than guns/rifles/conventional ammunition would be needed to trigger the operation of the exclusion.

The arms typically used by pirates to date (hand guns, rifles, AK47s, and RPGs) have generally been treated by Group clubs as not triggering the exclusion. However, the increased use of armed guards on ships could result in pirates resorting to heavier weapons of a type that triggers the exclusion. In this event, the liabilities will usually be covered by the owner’s war risks P&I policy.

3. What do hull underwriters cover and what do war risk underwriters cover?Depending on the shipowners’ particular insurance arrangements, hull and machinery (H&M) underwriters and war risk underwriters will between them provide property cover (H&M/GA/Salvage etc.) and war risk P&I cover. If a piracy incident triggers the club war exclusion (by virtue of the weapons of war provision), the consequent liabilities are likely to be covered by war risk underwriters. Also, as stated in FAQ 1 above, some primary P&I war risk underwriters also cover piracy as a specific named peril.

4. Should shipowners carry guards?There is no cover restriction or prohibition per se on the deployment of convoy escort protection or on-board security personnel and appropriately trained and competent personnel may well assist in enhancing on board security procedures and response. In each case, it is an operational decision for shipowners, which should be based on a specific voyage risk assessment, whether to carry guards, unarmed or armed.If on-board security is deployed, proper care and diligence should be exercised in relation to the selection of the appointed security company.

Consideration should be given to the appropriate number of guards required. BIMCO’s GUARDCON provides for a minimum team of four persons. This is thought to be a good starting point for most vessels but the minimum number is best determined through a risk assessment that takes into account the relevant characteristics of the vessel (speed, freeboard, hull length, any areas vulnerable to boarding, etc.) as well as local factors in the High Risk Area to be transited (history of recent attacks, reports of suspicious vessels, anticipated weather conditions, etc.).Whilst failure to use a prescribed or recommended minimum number of guards will not automatically result in any restriction on cover, this could depending upon specific circumstances and causation potentially impact on cover.

There are some private and State sponsored initiatives to develop systems for accreditation of private security providers which initiatives are being monitored and, to the extent appropriate, supported by the industry, including the Group. However, as far as the Group is aware, no such initiative is yet sufficiently developed for accreditation to be of much help to shipowners in the task of choosing competent, safe and professional security providers.

The deployment of armed or unarmed security should not be a substitute for, but in appropriate cases, a supplement to effective compliance with the latest version of the joint industry Best Management Practices (BMP).

A key part of compliance with the BMP is the liaison with naval forces, who can provide valuable intelligence and in some cases physical help to ships whose owners have followed the BMP procedures to make contact with MSCHOA (Maritime Security Centre Horn of Africa) and with UKMTO (UK Maritime Trade Office Dubai) before entering the High Risk Area. Contact details are easy to find in the BMP and where armed guards are to be carried shipowners should make this known to MSCHOA and UKMTO.

5. Should guards be armed?It remains the firm view of States and industry associations that crew should not be armed.

The previous strong opposition of industry associations to the use of armed guards has softened in the light of increasing levels of piracy activity in areas distant from naval protection and against a background of increasing aggression against crews. There has been a shift from general opposition to more neutrality, and in high risk cases, positive support for the deployment of armed personnel.

The underlying reasons against arming security personnel remain the risks inherent in use of arms by untrained/improperly trained persons, the enhanced risk of loss of life/injury through armed engagement, and the risk of encouraging the escalation of armed engagement and the use of more potent and warlike weaponry.

Flag State and Port State restrictions, and licensing requirements or prohibitions on placing and transporting security personnel and arms on board vessels, must also be carefully considered in any decision relating to the deployment of armed personnel on board vessels. It is important to ensure that armed guards are able to demonstrate that their weapons have been purchased, stored, exported, and transferred in accordance with the laws of all relevant State(s) supported by contemporaneous documentation in each case clearly identifying the relevant issuing authority. The Group is advised that the International Chamber of Shipping (ICS) is maintaining a table of “Flag State Rules and Requirements on arms and private armed guards on board vessels” which may be considered helpful in this regard.

Where armed guards are used, if there is a choice between Vessel Protection Detachments (VPDs) made up of serving members of a military force, or privately contracted armed security personnel (PCASPs), the former should be preferred other things being equal.

A thorough voyage risk assessment should be carried out in deciding whether to deploy armed security personnel on board. In the event that the decision is to deploy armed security personnel, shipowners should have regard to the IMO’s “Interim Guidance to Shipowners, Ship Operators, and Shipmasters on the use of privately contracted armed security personnel on board ships in the High Risk Area”, which was based upon industry guidelines and was issued by IMO as Circular 1405 on 23 May 2011. Circular 1405 was subsequently revised in September 2011 and May 2012. A copy can be downloaded from the Group’s website (www.igpandi.org).

6. Is cover prejudiced by the use of unarmed/armed guards?The extent of any prejudice to cover is likely to be dependent on loss/causation on a case by-case basis. It is unlikely that cover would be prejudiced by the use/actions of unarmed guards, but intervention by armed guards, whether on board or forming part of a privately contracted convoy escort detachment, could result in prejudice to cover if their use is in breach of Flag State, Port State or other applicable legal prohibition.

Shipowners should also ensure that the embarkation of additional security personnel does not place them in breach of SOLAS safety equipment and certificate requirements.

7. Are there any contractual/insurance issues with the use of security companies?There are a variety of different forms of contractual arrangements in use by on-board security providers and by States which may provide naval or military personnel on board. These arrangements may contain assumptions of responsibility to indemnify/hold harmless in respect of consequential losses and damages. The consequential liabilities assumed by shipowners may not be fully covered by their clubs and may be excluded if they would not have arisen but for the terms agreed and the club had not approved thoseterms in advance.

As a minimum there would be an expectation that the terms would contain reciprocal indemnities (and if limitation amounts are included, reciprocal limitation amounts) for liabilities arising from negligence or would be no less favourable to the shipowner than knock for knock.

It is essential that the PMSC has in place insurance to support its obligations and possible exposure under the contract (including public and employers’ liability insurance cover for itself and its personnel / subcontracted personnel). The insurance should be GUARDCON compliant. Shipowners are strongly encouraged to check that cover is in place.

Another potentially important contractual issue is the treatment of the Master’s responsibility and authority in relation to the use of arms. Contracts should recognize the Master’s responsibility for the overall safety of the vessel, but shipowners are strongly advised against contracting on terms where every decision as to the use of live rounds is referred to the Master whose experience and training may not have prepared him for combat decisions. These issues can be addressed by agreed Rules for the Use of Force, setting out in advance a framework for actions that may be necessary when no consultation is possible. A number of Flag States have prepared detailed guidance on what such rules might reasonably include.

Shipowners are encouraged to consult fully with their clubs before entering into such contracts, so that contractual shortcomings can be remedied.

Given the risk of the “weapons of war” exclusion being triggered (in which case there would then be no P&I cover), shipowners should also consult with their war risk underwriters on the proposed terms of security company contracts.

The International Group participated in the drafting of BIMCO’s GUARDCON standard contract for the employment of security guards on vessels. In turn, the standard insurance and liability provisions of GUARDCON conform with the requirements of club cover.

It is stressed that the use of GUARDCON is in no way intended to be a substitute for the proper exercise of due diligence by shipowners in ensuring full compliance with the BMP and in the selection of a security company to provide unarmed or armed guards for a vessel.

In the meantime, it has been reported by BIMCO that there has already been very significant take-up on the GUARDCON form by both shipowners and PMSCs. Hopefully as GUARDCON’S adoption becomes more widespread, this will reduce the burden on shipowners and clubs of checking individual PMSC contract wordings. GUARDCON is accompanied by guidance on Rules for the Use of Force (RUF) to assist shipowners and PMSCs.

8. Where can shipowners find best guidance to avoid being attacked?Clubs have made available to shipowners the BMP developed by the industry and first published in February 2009 (now in version 4 published in August 2011 and likely to be updated in autumn 2012) in response to the Somalia/Gulf of Aden situation. The BMP are kept under review and Version 4 reflects practical lessons learned by the industry and by the military as to effective methods to deter and defend against piracy. Industry associations such as OCIMF, ICS, BIMCO and Intertanko have also published general piracy guidance for shipowners which is available. Club websites as well as the Group’s website also provide useful information/updates/links.

Other organizations which are providing invaluable assistance and information specific to the Somalia/Gulf of Aden situation are the MSCHOA, UKMTO, the EU Naval Task Force (EUNAVFOR) and the International Maritime Bureau (IMB). Their contact details appear in the BMP.

The new, improved NATO Shipping Centre (NSC) website provides comprehensive and timely information about pirate activity around the Horn of Africa for the shipping community.

Shipowners with vessels transiting the High Risk Area (as defined in the BMP) are strongly encouraged to comply fully with all the recommended BMP planning, voyage and reporting procedures. Shipowners should pay particular attention to the defined limits of the High Risk Area which has greatly expanded since the problem first began.

EUNAVFOR has reported that in many cases shipowners were only partially complying with the recommended procedures, resulting in successful attacks which could otherwise have been avoided. The critical importance of fully complying with the BMP, the implementation of which has been shown to be effective in protecting vessels and crews, cannot be understated.

For vessels which have security personnel on board, unarmed or armed, confirmation of this should be provided with the usual reporting information prescribed under the BMP to UKMTO and to MSCHOA.

In the case of a successful hijack, a causative failure to comply with the BMP could prejudice a shipowner’s right of recovery particularly in cases where cover is provided on a discretionary basis. Cover could also be potentially affected by failure to comply with the BMP in the case of a small minority of Flag States that have made compliance with the BMP mandatory.

9. Who do shipowners/masters turn to help if their vessel is attacked?Shipowners/Masters should follow the procedures set out in the BMP and should coordinate with UKMTO, MSCHOA and IMB as directed therein. They should also follow any designated Flag State procedures. An up-to-date list of contacts and company/ship specific procedures should be readily available, particularly on the Bridge, radio station, command centre and/or citadel as appropriate.

10. What types of help do shipowners/masters need?Shipowners/masters should be provided with, and ensure compliance with the BMP in advance of entering into and during passage through piracy risk areas. If a vessel is attacked the master and the crew should follow the recommended notification and response procedures. Prompt notification will assist in early coordination of naval support to a vessel under attack.

11. If shipowners have to pay a ransom, who can they ask to contribute?Although details are kept confidential, currently it appears that ransom payments are being funded by K&R (Kidnap and Ransom) insurers where engaged and by war or property insurers (H&M/Cargo).

12. Are ransom payments covered by the clubs?As stated in FAQ 1 above, the usual P&I liabilities arising out of incidents of piracy will, provided the “weapons of war” exclusion is not triggered, be covered by clubs. Ransom is not a risk which is expressly covered and one club has an express exclusion of liability for ransom payments.

It is possible that ransom might be recoverable from clubs at the discretion of boards under sue and labour or omnibus provisions if this is not recoverable under any other insurance and cannot be recovered from other sources.

13. If there is an attack, can shipowners declare GA?Shipowners can declare GA in response to the common peril to ship and cargo interests for the purposes of recovering contributions towards expenditure incurred. It has been traditionally accepted adjusting practice and upheld by the English courts that a ransom payment made to obtain the release of a hijacked vessel/cargo is a GA expense for which shipowners are entitled to recover contributions.

Contributors in GA will include those with a financial interest in the adventure, typically shipowners, cargo owners and potentially charterers. P&I insurers may become liable to cover cargo’s contribution in GA where this is irrecoverable due to the shipowners’ breach of the contract of carriage.

14. Are shipowners obliged under their charterparty to transit the Gulf of Aden orcan they refuse the charterer's orders to do so?Shipowners’ rights and obligations in relation to charterers’ orders to transit the Gulf of Aden/HoA region will depend upon the nature of the charterparty (voyage charter or timecharter) and the relevant charterparty terms. Intertanko and BIMCO have developed piracy clause wordings which seek to preserve owner’s rights to either refuse orders to proceed to piracy risk areas or to seek alternative orders in appropriate cases. In each case it will be necessary to examine the relevant contract(s) to determine the extent of the shipowners’ rights and obligations and to negotiate an agreed allocation of risk betweenshipowners and charterers.

15. What if the charterer pays the war risks AP?Most of the piracy clauses expressly stipulate for charterers to pay additional insurances (amongst other expenses) resulting from charterers directing the vessel to proceed to an area of piracy risk, though this obligation to pay for additional insurance does not derogate from contractual rights. The shipowner may have to refuse orders or seek alternative orders. Issues may arise regarding the recoverability of additional insurance (and other) costs if the vessel does not proceed into a piracy risk area.